Kyle Bass On Rehypothecation And Other Keynesian Endgame Scenarios

If readers have the sense there has been a deluge of Kyle Bass reading (and viewing) materials on Zero Hedge in the past two weeks, it is because there has been: and why not - after all, unlike all other cheap talking heads, and know-nothing pundits who merely need a suit to make an appearance on one of the TV's financial comedy channels, Kyle has been consistent in the most important thing - telling the truth. Today, he took his resurgent popularity to CNBC which always knows which way the winds blow, and told David Faber more or less everything that Zero Hedge readers know already about Europe's collapse, on why the ECB will print but only after a default, and about the inevitable global debt restructuring. There was a twist: as most regulars here know, the key topic of the past week, of December, and potentially of 2011, is the limitless "fractional Prime Broker lending" of assets-cum-liabilities (and when it comes to the realization that one's gold itself may be rehypothecated, via GLD, it is no surprise why paper gold is plunging, with the expected delayed effect of slow comprehension) in an infinite loop of daisy chained counterparty exposure, also known as rehypothecation. Which is precisely what what Bass touches on 9 minutes 30 seconds into the interview when the discussion shifts to "shortening collateral chains." Must watch for everyone who enjoys not being lied to.

The most recent Kyle Bass investor letter can be found here, and a far more extended interview is here.

PM paper prices are going to fall hard, as the MF Ponzi has killed the futures market. There will be a separation between paper and physical prices, and people like Bass know it. This is the deflation scare, as far as I'm concerned. Q1 of 2012 is going to be a heck of a ride.

Faber and Santelli are good, the rest are a joke. I would watch a Kyle Bass interview with Joy Behar, he is that good. As far as a disconnect of paper and physical gold, I would like to see at least a $100. premium over near month futures for physical to prove it.

It's always interesting to see the CNBC commentators expose their skewed world view, basically every question they ask can be distilled to the following: Why can't the ponzi continue?

And Bass always does a great job of patiently explaining why the unsustainable is unsustainable.

You can't hedge against something losing value when no one wants it at all.

Of course, instead of further discussing this vital concept that is going to shape the markets of the world for the next several years, they are suddenly "short on time" so they can go to commercial or have one of their inane market updates that pretends to understand why stocks have moved in some direction over the last 5 minutes, or have an absurd panel of clueless idiots describe their "hot stock picks." Of course this was still a relatively long segment by CNBS standards, but it just goes to show that to these hosts, one guest is as good as another and all their points of view are equal. All that matters is getting to commercial.

loved the clip, great point about being short on time, pathetic. CNBC is somewhere between Financial ESPN and the TV version of USA Today....lots of pictures, big print, advertising and nothing else. Actually, USA Today has a horoscope.

Excellent point, he may curtail visits as he seems to realize he's just part of the circus. I also enjoy his talks and have learned a lot, funny they give to Faber and that alone was supposed to carry some extra weight or something, He was likely still shaking his head for several minutes afterward, and then remined of the head shaking by friends, hard to hide when he remained patient with Simon darling.... What? I'm English and I know the Europeans? Please, just say thanks when a very successful, eloquent person was giving you a private lesson the rest of us pay for.

"...The banks would move the only full chest of gold from bank to bank, just ahead of the bank inspectors. Sometimes they didn't make it in time. "

It's happened more recently than back in the Wild West days. Cecil and Jake Butcher did it in the 80's.

"The Butchers operated 27 banks in Tennessee and Kentucky. The banks collapsed in 1983 under the weight of unsecured loans, paper corporations loaded with debt and a massive shell game in which loans were shuffled from one bank to another ahead of the bank examiners. It was the fourth-largest banking failure at the time."

Still wonder what the "price" discovery method would be in an economic collapse. Will your one oz. gold eagle buy the whole cow or just a 5 lb. roast. In Cormac McCarthy's book "The Road" (granted the worst case SHTF scenario) gold has no value to the survivors. Food, weapons, clothing, etc... become the valuable items. I am still reading "When Money Dies" which provides insight into post WW1 Europe. They were trading gold watches for sacks of potatoes, grand pianos for sacks of flour, etc... So who knows what anything will be worth? I know, my family needs water, food and shelter to survive, so I will keep concentrating on my ability to provide those items in our uncertain future.

I agree that paper prices no longer reflect the prices for the physical, but they are still linked right now, correct?

When the system fails and people demand physical, the paper price will have to follow upwards. That is my understanding. The issue is that if the upwards correction is too quick, it could force bankruptcies or failures to deliver. In these cases, some of those holding paper gold will not realize gains because they will be owed by unreliable or no longer existing counterparties.

I guess my point is I would like to get some clarification on whether paper and physical prices really separate or whether it is more an issue that some paper contracts take zero value because of counterparty failure.

I'm no expert, so don't pretend to know how it will all finally settle. But my feeling is that the ponzi unwind at the Comex is currently underway. And like all ponzi's, their final blow is when the number of suckers exiting exceeds the number of new fools brought in. So for the Comex to fail, paper price needs to fall hard - a mass exodus over a short period of time.

Once the jig is up, we're talking literally about hours from a functioning paper market transforming into nothingness. And when there is only paper documentation as a claim (just as in the MF Global case where clients are looking for their initial deposits), owning the physical commodity is the only way to ensure wealth preservation.

Integrity is simply the degree of adherence to one's moral code. In this sense, the only way to act without integrity is to be inconsistent with your own ideals.

Further, every person acts to maximize their self interest, which means not only pecuniary gain, but also "moral" appreciation.

If you want to know who to trust, then you can trust that everyone will act to maximize their own self interest. Once you figure out their moral code and their integrity (adherence to it), then you can make an educated guess as to their prospective actions. However, in the vast majority of situations, the only thing you need concern yourself with is what action would maximize their pecuniary interest (especially in the context of business decisionmaking).

It seems like your post is based upon a false premise, that there was some universal moral underpinning to society before some unnamed event (2008? 1913? 1776?). Unfortunately, there is no such thing. I'll posit that your observations are erroneous because it is your perception of the world that has changed, not the world or the humans inhabiting it...

In the end, to answer your question, you can trust rational actors... so long as you're reasonably intelligent, you can think a few steps ahead... just remember that induction is for lazy minds. What you have to watch out for are rogue waves... the people who act without contemplation... and are fueled by some unknown emotion and passion. The neat thing is, the latter generally get nowhere of consequence... so depending on where you are in the game, you probably don't have to worry too much about them. But, every once and a while they slip in...

Integrity is not simply relative to a persons moral code. Stalin did not have integrity because he killed, stole and imprisoned anyone and anything he desired and was justified by his own sense of morality.

Integrity is the true currency of any society. Well before silver and gold were convenient comodity to store value, economies could move ahead solely on the basis of a man keeping his word that he gave you. If he defaulted he was considered to be a dishonorable person and his bad reputation would punish him.

This word of mouth is still the dominant marlket making currency, despite what the bean counters may tell you and rightly so. If you cannot a trust a person, no contract will bind him today as the lawyers can turn legal shyte into gold these days. But it is still shyte.

The underlying rot to our whole society is the prevalence of this belief that there is no such thing a honor or moral behavior. When people cannot make a deal on the basis of a handshake, that economy will see its cost of doing business sky-rocket, fraud become common-place and the defrauded derided as fools for trusting a market player.

We past this stage probably twenty years or so ago from what I hear, and all this collosal foolishness that surrounds us is the product of that bankruptcy of integrity. Normally the corrupt would have been replaced by now in a competitive market where the losers are purged, but today they rely on their ability to corrupt to convince those in power to save them from their own folly time and time again; the perpetual moral hazards.

Integrity is a fundamental requirement to any society that does not otherwise depend on savagery and fear.

Actually, he is "technically" correct, but leaves out some important infobits, which totally kill his argument.

In theory, integrity simply is "internal consistency".... so, THEORETICALLY, it just requires that one's one beliefs, actions, decisions, everything are consistent.

Problem is: For reasons of how logic works, that is almost NEVER the case for dishonest and self-deceptionary people. Why? Because logic is a bitch, and very often only achievable in a consistent way, if one ALSO is "truthful" (more on that german-specific term further down).

To put it in laymans terms, even though integrity "only" requires internal consistency, internal consistency cannot just be achieved by "believing really hard".... it requires that your concepts ACTUALLY are according to your best available knowledge, do not contradict each other IN SPITE of information from the real world! In other words: For "integrity" to match your behaviour, it is not enough to just lie to yourself and cheat yourself - because that implies an internal contradiction! You must be able to actually honestly explain everything to yourself logically consistently with your own rules, WITHOUT HAVING TO CHEAT.

And THIS typically is not achievable by mere stubbornness, but requires oneself to have a "model of the world", that matches the world, so that the model can without contradiction integrate new information.

As for that earlier mentioned term "truthfullness".... german language not only has a distinction between true/untrue and right/false (as opposed to the US-typical "true/false"-concept which makes little sense)... it has a similiar counterpart to integrity: Where integrity is meant to imply internal consistency, truthfullness is meant to imply external consistency (in other words, not just "inwards" consistency, but also "outwards" consistency (acting consistently to reality)).

Your post is pretty outside the boundaries of what I discussed and is not mutually exclusive with my post... I agree that integrity is an elusive goal and seldom achieved by humans... however, it is not insurmountable. There are many competing "models of the world" sufficient enough to pass reasonable academic muster (possibly limitless)... which none of their practitioners have any idea whether they are correct. To a large extent, the stoics got this issue right.

And yes, the objectivists got it right also... it is truly rare that someone can steal another's lunch and at the same time feel perfectly comfortable when someone else steals his or hers. Clearly, this would be inconsistent and abounds in political decisionmaking, but I digress.

In short, integrity is useless as an external decisionmaking tool because humans do not generally have much integrity... much better to be cynical and presume that (pecuniary) self interest motivates us, at the expense of all else. The neat thing about good stereotypes is that they're right most of the time... just don't bet the farm on an exception.

Well, my post really was meant to only explain the typical basic misunderstandings. Your post instead, goes deeper into the not so obvious issues.

And yes, i agree that a model apparently working without contradiction, does not guarantee that it is "true". Actually, if one only declares some levels of understanding irrelevant (by for example, judgeing only in terms of maths, while ignoring conceptual consistency)... it is possible to create a model of the world, that is the exact INVERSE of the probable truth, yet the model by itself working without any flaws at all (that was the big "achievement" of einstein, lol).

For those who couldn't follow the above, here's the short version:

- Yes, achieving integrity requires at least considering reality, so that one can integrate new information

- Yes, most people and models are not integer

- But also, no, a model merely apparently working without internal contradiction (so, it being integer), does not guarantee truth - especially if that model restricts what kind of tests/checks the model needs to pass (after all, you can always make something seem to work, if you just declare all the contradictions irrelevant :)

Yes, all groups of people (even individuals) develop a moral code... I wouldn't have much disagreement for you to say that "morality is the true currency of any society." The trick of course is agreeing on what is "moral." [hence why individuals can more easily determine their own moral codes, but why the process becomes much more convoluted when attempting to determine a group's. There's even a decent litmus test for when an individual acts without integrity, guilt... not so much when his or her actions with integrity conflict with the moral code of the group].

Your post is also inconsistent. You claim that you can't trust people to behave a certain way because they don't have integrity, but if you know that they will cut your throat to benefit themselves, then you can trust how they will behave... try out the philosophy for a day or two... see how many times it is right and wrong... and if more right than wrong than your present philosophy, adopt the new one...

Don't forget trustworthiness. It's very underrated. Much different than trust. Like water seeking its own level, one trustworthy party will recognize another trustworthy party. Kyle is trustworthy. Doesn't get better than that...

There's NO PROBLEM with inventory... But they WERE NOT selling (SE's for example) at what was their traditional $1.50 over spot...

All the guys I talked to were just in a "wait & see" mode... But they WERE NOT going to sell a SE for under $30...

So yeah... You could 'offer' $32 to some guy & he might take it or he might not... But the feeling I get is that the PAPER PRICE could drop to $20 bucks tomorrow & you'd still be bartering for around $32 - $33...

Depends on geography too i guess. At my local dealer in germany, i have no problem getting maples, philharmonikers and krügerrands at near paper-spot price....

...however, anything else rapidly goes up in price at that shop, and they do have a notice on their website, that larger quantities even of the earlier mentioned coins may take a month or longer.

May be specific to the order-strategy of my shop, or by local market specific. Just putting the data here.

Also, everytime i'm visiting them, i'm chatting with them, and among other things also talk about their market situation. And the repeated impression i get, is that the amount of people buying is much higher than those selling.

So, at least regarding local dealers in the area of germany where i'm living, my impression is that there are signs of shortages... but not shortages strong enough to disrupt the local market yet.

And you need immediate shortages, to make physical prices seperate from paper prices. As long as this kind of full-frontal scarcity does not happen, you can point at fundamentals all day.... they won't matter, until there are immediate shortages.

truthfully, you can use somebody's EBT card at a 30-40% discount. next time you go to the grocery store, start making eye contact with people near the checkout lines and in the parking lot when you're going in.

truthfully, you can use somebody's EBT card at a 30-40% discount. next time you go to the grocery store, start making eye contact with people near the checkout lines and in the parking lot when you're going in.

I recently met someone who does this exact same thing. He told me that the going rate was 50% of the face value of the card. Crackheads are apparently the best "mark", as you can often times purchase a $600 card for $200 cash.

Yes, short on collateral and what collateral is remaining may well be rehyothecated or is just pure crap. I wrote this earlier:

Liquidation by the European Banks and others suffering from the gathering category 5 derivatives driven liquidity/credit hurricane is accelerating. With rehypothecation, unknown counterparty solvency, mountains of sovereign debt which can never be repaid under the current currency regime of (currency backed by debt backed by currency backed by debt and so on), even with the ECB and Fed increasingly willing to take almost anything as collateral and the sound of the Fed's QE printing presses getting ready to fire up in 2012, we learn that the housing numbers are significantly worse than the national association of realtors (NAR) reported.

As part of the liquidation process, the European banks are selling off their best assets first, gold and silver. None the less, they only have so much to sell and the cash rich entities seeking to preserve their wealth can see that both gold and silver remain in a strong uptrend and have made close to a normal healthy 50% retracement off their most recent highs and are likely going to take advantage of these once in a life time bargain basement prices as the liquidation of the existing European bank gold begins to diminish in the coming weeks and months. Gold looks good for a one year futures entry point around the $1550 level and silver at about $25/$27 in my opinion.

The Fed needs political cover to re-engage QE and they know they need to time it right to help the President. If Gingrich or Ron Paul wins the election, the "End the Fed" mantra will grow louder and louder and the TBTF banks and in fact the global financial (international network) will not be able to survive the actualization of that extreme form of libertarianism, although for the long term economic health of the citizens of the world, it would be worth the short term pain, in my opinion, to get the central banks out of our economies and make sure that in the futures banks do the boring but essential function of old school banking.

In the meantime the liquidation will continue across all asset classes, despite the fact that the usual suspects in the various exchange stabilization funds are using repo and other Fed based manipulation tools to keep a very light market propped just barely above support. We'll see how much longer that lasts. A wise and deeply experienced associate of mine recently said, "markets go down when there are no buyers and markets go up when there are no sellers." Well, the situation is a little different from times past that today, at least in retail, there are very few buyers but there is one set of buyers that is exploiting that and those are the exchange stabilization index option and futures manipulators who work for the quasi governmental entities that are members of the US ESF.

What the FED probably needs in order to turn the printing press up to 110% is a market panic and all they need to do that is to turn off the ESF buying algorithms for the next few days and they'd have. My guess is that (if they can), they'll wait until just after the new year or perhaps until Friday of this week or some time next week. They want maximum emotional impact so that even the Tea Party members and their constituents are crying "give." The timing is tough here.

Just recently, these guys were laughed at when over the last couple of months they went massively short gold/silver by shorting every available call option. Track record speaks for itself: http://bit.ly/vBNHfH

What this means is that there is NO disconnect between physical and paper. In fact, paper is wagging the dog. Tulving and Apmex have no change in premiums for eagles, and if you think you aren't getting killed because you hold the real thing, you're wrong. Also, you're getting killed by holding the allocated funds like CEF and GTU as well. I am getting killed right now and I'm not too happy about it.

Wait until spot hits $15 and tell me there is no disconnect. APMEX has already had to modify their silver eagle sale. Must have been getting a shitload of orders for 19 or fewer of those, causing them to raise the price on that category, while the rest remain the same.

Even back in 2008, there was a disconnect. Anyone who thinks there won't be one this time is nuts. Anyone who thinks this time won't be much worse than last time is also nuts.

Paper gold and paper silver to zero, bitches.

Edit: Just checked again, and they cancelled their sale. Looks like Christmas is cancelled, bitchez.

Edit 2: Checked the number they had in stock, it's down 30,000 from where it was when I checked it at 8:00am. Run on silver, btchz.

Yeap. I checked into APMEX yesterday and I could get ASEs for 33.40 (small count with CC). Spot has dropped 2.50 and the price right now is 33.88. APMEX has been doing all manner of gymnastics in the last 24 hours regarding their 12 days of Christmas special.

I think that's because their 12 days of Christmas sale ended yesterday. The 2011 eagles were on special which is why they were cheaper to buy singularly than in rolls of 20. I can't even check the prices right now at Apmex... "Server too busy"

Well, I got on to check the status of my last order, and found that even though they received the payment two days ago, they have an estimated ship date of 12/26. Scrolling back through my history of completed orders, this wait time is almost without precedent. The only other time that there was that much delay between a check clearing and their ship date was in December of 2008, where I had payment cleared on the fourth, and they didn't ship until the fifth of January. It's not quite that bad, but that order was placed well before today's craziness.

Was it planned to end yesterday? It was still partially on this morning with only the fewer than 20 orders not getting the flat rate. Then it was different rates for every quantity category. I call shenanigans.

Ok, so your shop has some, and for a good price (30.55 when I called). All they have in silver rounds is "miscellaneous", but they have at least 200 oz. Anyone who is in the area should consider going to pick some up: http://www.whitmancoinandjewelry.com/contact.html

But sorry, you don't get an apology. There are a lot of anti-PM trolls coming out of the woodwork, and they do spread lies wherever they go. You don't get a cookie for not lying.

What am I welcome for? The phone number of a coin shop that is 2000 miles away? Yeah, that's real useful to me.

Look, the point is that many coin shops are shutting down, just like they did in 2008. APMEX is open, but delivery is being delayed, just like 2008. All signs point to this being a massive repeat of 2008. In fact, it looks to be so massive that the COMEX might just shake apart.

My point is this tmosley. I am a believer in physical as you are. And I am putting my "money" where my mouth is. I did not like being called out. I don't like these coin dealers. But I guess if they bought at spot when spot was 1,700 they don't want to sell at spot when spot is 1,600. Is that the definition of the markets seperating?

So you're not a troll... That's been established... & now everybody on ZH knows where they can go to get Silver eagles for $1.50 over spot when the paper price crashes down into the teens because fonzanoon believes the market should be determined by levered paper transactions even though it has no clue as to whether there is underlying physical to support the assumption...

Agreed... what's he trying to do, unglue the system? He needs to report to commander Bernanke for new marching orders rather than make things up willy nilly based on "facts" and "critical thinking". What a nerd.

I like his demeanor and delivery, too. Nerd never occurred to me. I think he's more like a surgeon who just performed 6 hours of exploratory surgery on your mother and is sitting down to tell you exactly what he saw. Best pay attention, the news isn't good.

FAZ has a heavy REIT makeup, when IYR isn't following the trend, this is what you get. Its also unfortunate that Beserkshire- Hathaway is such a heavy weight too. Rarely does FAZ do triple (inverse) of XLF, that R1FIN index is the least volatile of XLF or BKX.

I think Tony Montana invented rehypothecation in Scarface when he told the Columbians in the hotel, "I don't have the money, but it's close by." Of course, that got Angel chainsawed to death in a shower.

Hyp/Re-hyp is the market. While we're at it, why not say that Leverage and fractional reserve banking can't be done either?

Look, I get where you're coming from, but the truth is Hyp/re-hyp is something people have on their resume's. It's not some obscure thing or concept. It just needs strict, straightforward (and punishable) regulation.

Elimination would collapse the market. plain and simple. (there are like 30+ working financial mechanisms, if stopped, would collapse the market.) The market, being a living thing, needs all it's current parts to survive. Like a body, it wouldn't function without the lungs. ...or heart. ...or bones. ...nervous system. ...or skin. etc.

I've long railed against so many bad parts of our market, but not the market as a whole. Abuses are what needs to stop. Regulations need to be strict and punishable.

Abuses are what needs to stop. Regulations need to be strict and punishable.

and you've also explained why the market as a whole cannot work, enforcement is beyond the realm of ponzinomics. Its a turd with two ends>>Greed/fraud pushes it out, rules and enforcement pinches it off, right now the bankers are going purple trying to keep the push going trying to avoid the pinch.

Isn't that an admission of the need to not use hypothecation/re-hypothecation, along with CDS's and MBS's?

Honestly, at some point, sane adults need to admit that 40:1 leverage unbacked by collateral is not "captial" or "investment" or a "market" but the selling of black tulips and shares in the South Seas compnay.

Agree. But in a rapidily expanding and PRODUCING market -- leverage is consistent with the pace of growth. When growth is illusion and the market is based on consumption not production then leverage is atomic. Never known a modeler who could actually see the forest for the trees.

"I've long railed against so many bad parts of our market, but not the market as a whole. Abuses are what needs to stop. Regulations need to be strict and punishable."

Hyp/re-hyp is a common standard in the banking industry. Just because everyone never heard of it doesn't mean it needs to be eliminated. Just like CDS, IT NEEDS STRICKTER REGULATIONS!!!!!!!!!!!!!!!!

Similar to a a car's breaks, just because a person doesn't know how the hydraulics in a disc break works, doesn't mean hydraulics should be eliminated from the car.

Hyp/re-hyp is a new "fancy" term to most people, but if your in the industry, it's not this evil thing. It's part of the business. When Lehman collapsed, it's how creditors were partially recapitalized.

It needs tighter rules. Not elimination. Same as CDs. Same as Leverage, Same as Frax-res.

I've written many articles about these abuses. I couldn't be more familiar with them. I wrote those YEARS AGO! From 2005-2008, I was one of the economic worlds biggest blogging voices that was trying to wake the public up about this.

Mario Draghi has been refreshingly different than The Benbernank. Kyle Bass is a very smart man, I remember at Jacksons Hole, there was a David Faber interview of Kyle when he asked, Italy and Spain are donors to the bailout fund, yet they will be needing money too. "How does that work?" Kyle said to DAVID! BRILLIANT!

Endgame? Wait a minute. Did the French Franc, the Lira, Peseat or Drachma ever crash? Hyperinflation? No, only devaluations. Euro the same. There is no such thing as an endgame; even fiatmoney always keeps some attraction. The $$$ proves it.

“Gold at a 7 weeks low down to 1635. Where is 2000 gold dear gold bugs?”

Indeed, what endgame? The folks on KWN were, hmmm, slightly toooo optimistic. They have any interest in PMs, maybe?

The more relevant question is... Where is [enter today's SPOT PRICE] gold?...

read my comments above... I've been to 3 coin shops today & I'll tell you where the gold is... It is sitting in their inventory... They are sitting on it & won't sell it at PAPER MARKET prices at the moment...

The scary thing is that if they won't even part with a little of it today, what's going to happen if the paper price REALLY crashes...

It seems Farber has done a uturn..he used to be a big dot com pusher...then he probably got burned..then burned again in 2008..now he sees it coming again and is not going to get burned again..he has become more negative than before....IMHO

I agree. I remember reading that a good sign of the nearing collapse is the dollar and gold going up simultaneously. The thought being that these would be the last two "stores of wealth/safe havens" left standing in the ponzi. With gold being the eventual champ over the non-backed, paper fiat dollar. Looking forward to the violent PM move up!!